The first several days, we talked about your business plan. It was all about a bigger picture look at your business. What do you want your business to do for you? Why are you in business?
Then we got into some operational things. We started talking about the practical stuff. How can you operate more efficiently?
The next few days we'll get into the money.
Nothing trips gig economy contractors up more than the money. Because of that I want to get a good look at how the money works for us. When we see what we do as a business and treat the money as a business would, it really helps us avoid the problems that can blindside contractors.
We've already talked some about profit when we got into profit per hour.
We'll talk some more about taxes in a few days. But when you file your taxes there are a couple of ways you report your income. If you have a W2 job, you include your pay that you received from your job on your tax forms. Your business's version of a W2 is something called a Schedule C. (A lot of people think it's the 1099 – we'll get into that more when we talk about taxes).
The title of the Schedule C is “Profit and Loss from Business.” It's on the Schedule C that you list all the money you made. Then you list all the expenses. If you had more expenses than earnings, it's called a loss. If your earnings were more than your taxes, you had a profit.
Here's the important thing to know about your taxes. Understanding this also helps you understand how your business is really doing.
When you pay taxes, you pay based on your profit, not on the money that Grubhub and Doordash and Uber Eats and others gave us.
It's the PROFIT, the money left over after expenses, that matters. Not the money that came in.
That matters on taxes. It also matters in real life.
Why is this important?
People get themselves in trouble. They see all the money coming in and think cool, I can just spend it as though it's my paycheck. But when taxes come around or when your car needs major work you're up a creek.
I really encourage you to get into a profit and loss mindset. To think of how you're doing in terms of your profit, not the money that's being paid.
Be aware of the cost of running your business and be prepared to pay those costs.
Here are some things that a Profit and Loss mindset do for you:
It makes you take the idea you're running a business seriously.
The more you think ‘business' the more you act ‘business.
When you think 'employee' you act 'employee.'
When we think of the money coming in as our paycheck, it's real easy to equate that to being paid by an employer. In that regard, your employer has the control. You're kind of at their mercy.
When you think in terms of profit and loss, you're looking at a lot of things. More than anything, I think it puts you in control. You weren't making enough? You can do things to control the costs or find ways to earn.
It puts you in a position to prepare you for what's coming up.
Tomorrow we're diving in deeper on the real cost of using your car for deliveries. It's more than you might think.
When you're aware of what your costs are and you understand those costs mean you didn't make as much money as you thought, you become more careful about those costs.
That puts you into a long term thinking mindset. It puts you in a spot where you're paying attention to what you will need later, rather than just looking at what's coming in today.
You understand how you are really doing.
I think this is one of the biggest dangers of the gig economy.
People go into this, only focusing on the money coming in, and they think they're doing very well.
The reality is, they're making far less than minimum wage. There's a lot of that out there.
How do you know if that's you?
When you understand what your costs of doing this really are, you get a better feel for how you really are doing. Once you undestand your profit, you know how much of the money that comes in you can really use, and how much you should hang on to.
All of this is more of an introduction to the topic.
We're going to get into some more specifics in the next few days.
But wit that in mind, here are a few things that I'll throw out for you to keep in mind:
Do you know your actual profits?
Do you keep track of your expenses?
Do you know what it actually costs to operate your business?
Are you tracking your expenses?
More than anything: Are you keeping a record of the miles you are driving?
As I mentioned, you are taxed based on your profits. A big part of figuring those out is knowing how many miles you drove for business (and being able to show how you came up with those miles).
If you are not aware of this: you can claim your business expenses whether or not you claim the standard deduction on your taxes. So what that means is, no matter your filing status, the more you track your expenses including your miles, the less you pay in taxes.
Are you keeping records?
There are several ways you can keep your records.
You can simply write it all down in a notebook or on a spreadsheet.
You can use programs like Quickbooks or other programs.
This past year, a lot of contractors discovered the importance of good records in ways they never would have thought of before. Much of the aid available due to the pandemic is based on how much money you earned. Since we are classified as businesses, it's all based on our records, our profit and loss.
And each program asked for different things. None of it was based on your 1099's. It was all based on your business income and expenses – your profit and loss.
A lot of people had to go back through all their stuff, do a lot of extra math, to try to get qualified. If they had a good record keeping system in place, they would have saved a lot of headaches.